The Chief Secretary to the Treasury (Mr Simon Clarke)

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I beg to move, That the Bill be now read a Second time.

People across the country are facing rising energy costs and an increase in the overall cost of living. Of the basket of goods and services that we use to measure inflation, a record proportion are seeing above average price increases. Indeed, the country is now experiencing the highest rate of inflation for 40 years, which is causing acute distress to the people of this country. In May the Government announced a series of measures to help the British people during this difficult time, in which we have seen oil and gas prices reach new highs; oil prices have nearly doubled since early last year and gas prices have more than doubled. This is a global phenomenon that is driven by factors out of any single Government’s control, in large part resulting from Russia’s illegal war.

With increased prices at the global level, profits from oil and gas extraction in the United Kingdom have also shot up. These are unexpected, extraordinary profits—above and beyond what forecasters could have expected the sector to earn. Because of these extraordinary profits, and to help fund more cost of living support for UK families, the Government are introducing an energy profits levy. The temporary levy is a new 25% surcharge on the extraordinary profits. When oil and gas prices return to historically more normal levels, it will be phased out.

Mr Clarke

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The answer is: prices of an order that we saw prior to Russia’s invasion of Ukraine and prior to some of the inflationary pressures resulting from the covid disruption—prices more akin to those seen in 2021. Indeed, we could also refer to factors that predate that, back to 2019. The system has clearly been in flux, but I would certainly not want to encourage the artificially low prices of 2020 to be seen as a baseline for these purposes.

Mr Clarke

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I will set out more about our investment incentives in a moment. We are not going to tie ourselves to a specific price level, but will obviously look towards a return to more normative market conditions—not, as I said, the artificial lows of 2020—such as the pre-crisis situation in 2019 and some of the much healthier pattern of last year, prior to what Russia has done in Ukraine, which has obviously driven prices to new highs. That gives the House a sense, but we will obviously set out our thinking well in advance of repealing the levy.

I am firmly committed to our net zero strategy.

Mr Clarke

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No, I will not; I am going to make some progress.

As set out in the energy security strategy, the North sea will still be a foundation of our energy security for years to come. Currently, about half our demand for gas is met through domestic supplies. In meeting net zero by 2050, we have to be realistic; we will still be using about a quarter of the gas that we use now. It is therefore necessary to incentivise investment in oil and gas, and to encourage companies to reinvest their profits to support the economy, jobs, and our energy and security, but it is possible to tax extraordinary profits fairly and to incentivise investment. That is why, within the energy profits levy, a new “super-deduction” style relief has been introduced to encourage firms to invest in oil and gas extraction in the UK. We expect that the energy profits levy, with its investment allowance, will lead to an overall increase in investment. Indeed, one oil and gas company has already said that the immediate investment allowance should spark further investment in the North sea. The new 80% investment allowance will mean that, overall, businesses will get a 91p tax saving for every £1 they invest, providing them with a clear incentive to do so. This nearly doubles the tax relief available and means that the more investment a firm makes, the less tax it will pay. Unlike Labour’s windfall tax in 1997, this levy both incentivises investment and raises more revenue.

The energy profits levy contains an investment allowance that doubles the overall investment relief for oil and gas companies, unlike Labour’s proposal of a few weeks ago. Our levy raises around £5 billion over the next 12 months against Labour’s estimate of around £2 billion for its proposals. Its windfall tax would raise less than £70 per household, not £600 as it claimed. In fact, the Opposition’s regressive VAT plans would give millionaires in mansions more off their bills than those in need. They are now caveating their windfall tax costings by stating that their £600 per household support will be supported by “other measures”. By that I presume they mean more public spending and a higher rate of taxation for hard-working people across this country. As usual with Labour, the sums sadly do not add up.

The new tax we are introducing today ensures that the extraordinary and unexpected profits from which oil and gas companies have benefited are taxed fairly and provide a significant investment incentive. This is a sensible considered move and one that will be warmly welcomed across the House.

Our plans mean that the oil and gas producers can claim the allowance when their spending on investment is actually incurred. This is unlike the allowance under the existing permanent tax regime for oil and gas companies, which can be claimed only once income is received from the field, subject to the investment, and, as some Members of the House will know, that can take several years.

I want to make it clear what the investment allowance will apply to. First, if capital or operating expenditure qualifies for supplementary charge allowance, it will qualify for the energy profits levy allowance. As the levy is targeted at the extraordinary profits from oil and gas upstream activities—that is the profits that came about owing to global price increases—it makes sense that any relief for investment must also be related to oil and gas upstream activities.

Secondly, such spending can be used to decarbonise the oil and gas production, for example through electrification. Therefore, any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ringfence, will qualify for the allowance.

Mr Clarke

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I can provide that assurance from the Dispatch Box. Examples of electrical expenditure on plant and machinery will be things such as generators, which include wind turbines, transformers and wiring. I also remind the House that there are other tax and non-tax levers to support non-oil and gas investments, such as in renewables. Those levers include the super-deduction and our competitive research and development tax credit regime. Importantly, the returns on these investments are taxed at 19% rather than at 65% as for UK oil and gas profits.

We have been listening closely to feedback from industry. Late last month, my right hon. Friend the former Chancellor met industry stakeholders in Aberdeen to discuss the levy and to make sure that it works as the Government intend it to. As my right hon. Friend the Financial Secretary to the Treasury confirmed in a debate last week, the Government have changed the legislation, which is reflected in the Bill before us today.

Tax repayments that oil and gas companies receive for petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. These are repayments that are typically taxed under the permanent tax regime. However, as wider decommissioning expenditure is also left out of the account for the levy, this change is both consistent and fair. I wish to reiterate my thanks to those in the industry with whom we have engaged on this matter, and to again reassure the House that, with this change, the Government still expect the levy to raise around £5 billion over the next year.

On how long the levy will be in place, it will take effect from 26 May this year and, when oil and gas prices return to historically more normal levels, it will be phased out. The sunset clause in the Bill ensures that the levy is not here to stay. There are very few taxes that have their expiry date set in law, so this provision demonstrates the Government’s commitment to keeping the levy temporary and gives oil and gas companies further reassurance as they seek to plan their investments.

Our permanent oil and gas tax regime is competitive globally against similar operating environments and is lower than that of Norway, the Netherlands or Denmark. However, it is both fiscally prudent and morally right that we have a temporary and targeted levy that applies to extraordinary profits in our oil and gas sector and reflects an extraordinary global context.

Through the Bill, the levy will raise some £5 billion of revenue over the next year so that we can help families with the cost of living through significant and targeted support to millions of the most vulnerable. These are extraordinary times and we are seeing extraordinary prices, and that requires extraordinary Government action.

I did not come in to politics to raise taxes, nor did this Government, but we are about delivering the action required to support families in their time of need. At the same time, the Government are clear that we want to see the oil and gas sector reinvest its profits to support our economy, jobs and energy security. For those reasons, I commend the Bill to the House.

The Financial Secretary to the Treasury (Lucy Frazer)

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It is a pleasure to close this important debate on behalf of the Government. We have talked today about the context of the Bill: the high oil and gas prices, and the extraordinary profits that are being received by the industry while working people struggle with the cost of living. We are introducing a temporary, targeted levy to fund cost of living support, at the same time as encouraging companies to invest.

Let me start by responding to some of the points made by the hon. Member for Ealing North (James Murray). He criticised our levy for not raising enough, but, as was pointed out by the hon. Member for Aberdeen South (Stephen Flynn), Labour’s proposal would have raised only £1.2 billion at the time when it was made, whereas our levy will raise £5 billion—more than the £4 billion called for by Greenpeace, more than the £3.7 billion called for by the Green party, and, as I have said, significantly more than the amount proposed by the Labour party.

The hon. Member for Ealing North criticised our scheme because it will encourage investment, while the hon. Member for Erith and Thamesmead (Abena Oppong-Asare) said that we needed domestic energy security. We are ensuring that the important oil and gas sector will continue to invest so that we have that domestic energy security. The hon. Gentleman criticised us for not listening to industry, but I noted that neither of the Labour Front Benchers was able to say how or when they had engaged with industry. As Conservative Members know, last month the Chancellor held an industry roundtable which was attended by me and by the former Exchequer Secretary, my hon. Friend the Member for Faversham and Mid Kent (Helen Whately).

Let me quote some of what has been said by representatives of the industry about our investment proposal. Orcadian Energy has said:

“We believe the immediate investment allowance, included in the Energy Profits Levy, has transformed the attractiveness of domestic oil and gas projects for companies extracting oil and gas in the UK and it should spark further investment in the North Sea.”

Cornerstone Resources has said that there has been

“more interest in partnering with us”

in the last few weeks. I could go on, but what we are trying to do is raise money to help with the cost of living, at the same time as encouraging industry to invest in a vital sector.

Let me now answer some of the questions put to us by the hon. Member for Ealing North. First, I can confirm that the Chancellor supports the Bill. I also want to respond to the point about consultation. The hon. Gentleman was, of course, encouraging us to do this a long time ago, but now he says that we should have consulted for longer and, therefore, introduced the measure later. We have sought to engage, and put the industry on notice, as much as possible regarding the announcement of the levy. Ministers in my Department have been in regular contact with the industry and we also undertook a short period of technical consultation on the legislation for the levy. Hon. Members will know that draft legislation was published on 21 June, with stakeholders able to provide technical feedback on it until 28 June.

The hon. Member for Ealing North asked what we were doing about the electricity generation sector. As the former Chancellor said at the time, that is something we are urgently looking at. The hon. Gentleman said that we should follow Labour’s plan. Well, let us remember what Labour’s plan is. Labour has put forward £100 billion-worth of spending proposals, of which only £10 billion-worth are fully funded.

I would like to mention the passionate and important speech from my hon. Friend the Member for Waveney (Peter Aldous). He rightly identified the need to balance short-term measures with long-term investment, and I hope that that is what we are doing. He raised the importance of renewables. As I have had the opportunity to discuss with him before, there are other tax levers and non-tax levers to support non-oil and gas investment, including the super deduction and the UK’s research and development tax credit scheme. There is also the contracts for difference scheme, which provides developers of low carbon electricity generation with direct protection from volatile wholesale prices, and the £1 billion carbon capture infrastructure fund.

My hon. Friend also asked about the timeframe. That is an important point, because this is a temporary measure. There is a sunset clause in the legislation. It is rare to include a sunset clause, but we have done so to underline that this is a temporary measure with a timeframe of 2025. He raised the importance of dialogue with the industry, and I reassure him that we have engaged fully with the industry and will continue to do so.

Lucy Frazer

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The hon. Member makes an important point, because we value the investment and work that is going on in Scotland in the oil and gas sector and in renewables. He knows that, because I and Ministers from the Department for Business, Energy and Industrial Strategy have stood at this Dispatch Box and engaged with him regularly on this. He is right to identify that that cluster is in reserve, and I am sure these matters are being discussed with the relevant Ministers in BEIS.

I recognise the points that the hon. Member for Aberdeen South made about the sacrifices made by those who work in this sector. I am grateful to him for making those points, which I am happy to associate myself with. He asked what the normal price was, and I would like to refer him to the comments that the former Chancellor made when he was questioned on this by the Treasury Committee. He said:

“The last time this was done, a price target was published, which was $74 or $75 for Brent…If you look at average Brent price over the last five or 10 years, that will give you something like $60 or $70 for oil…so that gives you a sense.”

This is something we will be considering in due course.

Lucy Frazer

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As I have just said in responding to the hon. Gentleman’s earlier point, the former Chancellor said that that “gives you a sense”, and I too am happy to relay that sense of where the prices would be, but we also have the long-stop date, which should give the industry some certainty as to when this will finally come to an end.

I welcome the hon. Member for Wakefield (Simon Lightwood) to this place. I was born and made in Leeds so I am very pleased to welcome a neighbour, in one sense of the word, and to hear him extol the virtues of Wakefield. He made a passionate speech about standing up for victims of sexual abuse and I welcome him to his place in the House of Commons.

The hon. Member for Bath (Wera Hobhouse) asked for bold and swift action, and that is what this Bill is about. Tonight this House has the opportunity to support the introduction of an energy profits levy on the extraordinary profits of UK oil and gas producers. It has the opportunity to support investment in the North sea through the levy’s investment allowance, and to support the automatic expiry of the levy in law, giving companies additional reassurance that the levy is temporary. This is a balanced approach that allows the Government to deliver support to families while encouraging investment and growth. For those reasons, I urge Members of this House to support the Bill.

Question put and agreed to.

Bill accordingly read a Second time.

Lucy Frazer

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Thank you very much, Mr Chair. I open this debate by reminding the Committee of the purpose of the energy profits levy. The levy is a temporary 25% surcharge on extraordinary profits being made by the oil and gas sector as a result of the substantial rise in energy prices precipitated by the Russian invasion of Ukraine. It will help to fund the cost of living package for UK families that we announced in May. It will raise around £5 billion over the next year and will apply to companies within the ringfenced corporation tax regime. Specifically, these are companies involved in the exploration for and extraction of oil and gas in the UK and on the UK continental shelf.

The Government have been clear that they want the oil and gas sector to reinvest its profits to support the economy, jobs and UK energy security. That is why the Bill includes the 80% investment allowance. This new super deduction-style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK. In future years, if oil and gas prices return to historically more normal levels, the Government will phase out the levy. However, the first clause in the Bill specifies that the levy will automatically cease to apply after 31 December 2025. I want to highlight this to the House, as it demonstrates the Government’s commitment to keep the levy temporary. Very few taxes have their expiry date set in law. Before I address the clauses and schedules in the Bill in turn, I would like to say that I have noted the amendments and new clauses tabled by Opposition Members and I will respond to them later in the debate.

Clause 1 gives the Government the ability to collect the energy profits levy. It sets the 25% rate and the levy’s main scope. The clause sets out that the levy applies to accounting periods for when the measure is in effect. It also sets the adjustments to ringfence profits for the purposes of calculating taxable profits for the levy. The levy is a tax on profits that companies are realising from oil and gas activities during what is an exceptional period. It is only fair that the measure of profit on which the EPL is charged should not be reduced by the amount of decommissioning expenditure or losses incurred from previous years. Therefore, those adjustments, which include finance costs, decommissioning costs and historic losses, are left out of account. However, the repayment of petroleum levy revenue tax arising from decommissioning is also left out of accounts. As I mentioned on Second Reading, the Government have responded to feedback from the industry in making this change. Although such repayments remain taxed under the ringfenced corporation tax and supplementary charge, they are not taxed under the levy. Another adjustment to profits is the new 80% investment allowance, which is deductible against profits.

Lucy Frazer

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I have read amendment 9 and will address it in due course. In response to the hon. Gentleman’s point, that will be included in guidance. I said it at the Dispatch Box last week, and my right hon. Friend the Chief Secretary to the Treasury has also said it at the Dispatch Box, so I think that point is quite clear.

Clause 5, on the meaning of “disqualifying purposes,” is an anti-avoidance provision to ensure that expenditure is not eligible for the investment allowance if it arises because of any tax avoidance arrangements. Clause 6 ensures that additional expenditure for the investment allowance is available only for new assets, including the acquisition of an interest in an oilfield. It prevents the allowance from being generated on assets that have already been taken into account for the purposes of the levy or that would have been had the levy been in force.

Clause 7 determines when investment expenditure is incurred. For capital expenditure, it is as per the rules set out in the existing capital allowances legislation; for operating and leasing expenditure, it is the date on which it is paid. The clause also makes it clear that expenditure incurred before 26 May 2022 or after 31 December 2025 is not to be treated as expenditure incurred in an accounting period to which the levy applies.

Clauses 8 and 9 define financing and decommissioning costs and are modelled on existing legislation. Clause 10 and schedule 1 set out the loss regime within the levy. This includes group relief and the losses that companies carry back or forward under the levy, such as carrying forward losses to a future qualifying period. Clause 11 applies general corporation tax principles to the levy, which is treated for administrative purposes as an amount of corporation tax. It also prescribes the framework within which the levy will operate.

Clause 12 introduces a requirement for companies making a levy repayment to provide information about that payment to HMRC, so that receipts from the levy can be monitored. Clause 13 provides for necessary adjustments to be made if alterations are made to a company’s ringfenced profits or losses. Clause 14 introduces schedule 2, which makes consequential amendments to enactments in the light of this Bill.

Clauses 15 to 17 set out the rules for apportioning profits for accounting periods that straddle the levy’s start or sunset dates. These rules identify which profits are chargeable to the levy by treating the periods before and after the start or end date as separate accounting periods. In particular, this requires companies to apportion their receipts, expenses, assets and liabilities on a just and reasonable basis. Clauses 18 and 19 simply set out the Bill’s legal interpretation and short title in the usual manner.

This Bill delivers the energy profits levy, a 25% surcharge on the oil and gas sector’s extraordinary profits. The levy will raise around £5 billion over the next year, and it will go towards supporting people via the cost of living measures we announced in May. The Bill also provides for the new 80% investment allowance, which means that businesses will overall get a 91p tax saving for every £1 they invest. Finally, the Bill provides certainty through a sunset provision. It will therefore give businesses further reassurance that the levy is indeed temporary.

Lucy Frazer

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Many of the points that have been raised in Committee were considered on Second Reading, but I would like to touch on a few of them and then deal with amendments.

The hon. Member for Ealing North (James Murray) asked how the new investment allowance works. On 6 June, I said I was very happy to look further at this point, and I can reassure him that the investment allowance within the levy will be generated on investment expenditure —that is, capital expenditure and some operating and leasing expenditure—incurred on or after 26 May. The legislation includes an anti-avoidance provision to prevent any recycling of existing assets from getting the allowance, and that is all very clearly set out in clause 6.

I want to deal with some of the points made by my hon. Friend the Member for South Thanet (Craig Mackinlay), because I understand his objections, and no Conservative wants to bring in a tax rise where it is not necessary. I have had the opportunity to talk to him on a number of occasions about these measures, and he will know that they are targeted and temporary. He says he fears for investment coming through, but of course that will be assessed by the OBR in due course. I am not sure whether he was in the Chamber earlier when I quoted some companies that have said that they will be investing and that this encourages investment, but I will mention a further one. Kistos has said that it is

“assessing opportunities in the UK that would enable us to take full advantage of the investment allowances implicit in the recently introduced UK Energy Profits Levy”.

I turn to the amendments. Amendment 1 would require companies to report on how much additional tax relief they are claiming as a result of the levy’s investment allowance, in addition to the existing requirement to report how much levy is payable. The amendment would also require that data to be published on a quarterly basis. Companies will already be reporting the information to HMRC that allows it to ensure appropriate compliance with the law, and figures on the amount of tax raised through the levy will also be published on a periodic basis in line with other taxes. As a result, this amendment should not be made to the Bill.

Amendment 9 would add clarification to the allowable purposes of expenditure under the levy’s investment allowance. I have already dealt with that point on Second Reading, and I confirm to the Committee that HMRC will clarify this in written guidance.

New clause 1 calls for an assessment of the impact on revenue and on oil and gas companies’ profits of a 45% levy rate. Similarly, new clause 8 calls for assessments of the revenue impact of a permanent 30% levy rate, which would bring the permanent headline rate of tax for oil and gas companies in ringfence corporation tax to 70%. However, it is not standard—I will be saying this in relation to a number of new clauses—for the Government to publish assessments of the fiscal and economic impacts of measures that they are not introducing, and it is not clear that doing so would be a beneficial use of public resources. Therefore, I recommend that the Committee rejects these new clauses.

Again, new clauses 3, 5 and 9 would require reviews or assessments of policies that the Government are not introducing. New clause 3 would require a review of the revenue that would have been raised had the levy taken place from early January. I set out on Second Reading why we did not bring forward this measure earlier, and I did so last week as well. We are not supporting these measures because, as I have said, it is not usual to bring forward public assessments of measures that we are not introducing.

New clauses 2, 6 and 10 would require reviews or assessments of the impact of the investment allowance on the energy market, climate change commitments and exploration activity. The Government oppose these amendments on the basis that the Treasury already carefully considers the impact of all measures on the energy market and our climate change commitments as a matter of course.

New clause 4 would require a review of the amount of investment allowance that will be claimed and how it relates to expenditure that would have happened were the investment allowance not in place. The first point to reiterate here is that the Government expect the combination of the 25% levy and the 80% investment allowance to lead to an overall increase in investment, and the OBR will take account of this policy in the next forecast. HMRC already publishes data on the costs of non-structural reliefs, which will include the investment allowance in due course, once data is available.

Finally, new clause 7 would require the Government to publish regular reviews of the oil and gas market, including assessments of the need for the levy and whether it should be continued to promote further decarbonisation of upstream oil and gas activities. That is also unnecessary, since the Government already monitor the UK oil and gas sector, and data is published on gov.uk on a monthly and quarterly basis.

For all the reasons I have set out, I urge Members to reject all the amendments and new clauses. I commend the clauses and schedules to the Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Additional expenditure treated as incurred for purposes of section 1

Amendment proposed: 9, page 2, line 42, at end insert

“, which may include electrification investment that decarbonises upstream oil and gas activities”.—(Stephen Flynn.)

This amendment would put on the face of the bill that electrification investment which decarbonises upstream oil and gas activities is eligible for relief.

Question put, That the amendment be made.